Accounting for Trees

November 2nd, 2010

Recently I wrote a post on illegal logging—a type of illicit financial flow—and the practice’s adverse effects on development.  I noted that as with other, more widely understood, types of illicit financial flows, illegal trans-boundary logging can undermine political legitimacy, rob developing countries of tax revenue, and exacerbate conflicts.  Moreover deforestation associated with illegal logging can deprive developing country citizens of a resource that—unlike drugs and minerals—has value even as it remains fixed, as 1.2 billion people depend on forests for wood, fuel, fodder and food.

One reason deforestation and loss of biodiversity are such alarming problems is that the full costs and benefits of the actions are not fully considered.  One reason for this is that these resources are not included in formal valuations of a nation’s wealth.  This fits into a broader problem: all over the world some of our systems of accounting—whether on a macro- or a micro-level—are riddled a number of holes and discrepancies.

For example, as Christian Aid, Publish What You Pay, the Task Force and many others have repeatedly pointed out, the International Accounting Standards Board (IASB) should mandate a country-by-country financial reporting standard.  The practice is common sense.  In recent months some countries have made strides toward this goal, but until the standard is universal, the rules will not be completely effective.

Similarly, the way that the world as a whole and individual countries think about national accounts can be flawed.  In general terms, national accounting provides a conceptual framework for measuring the economic activity of a nation, including “macroeconomic accounts, balance sheets, and tables based on internationally agreed concepts, definitions, classifications, and accounting rules.” But it can sometimes miss critical component, including assets that are not traditionally accounted for in the system, but nonetheless have value.

It brings me back to the problem of illegal logging.  Many countries have vast natural resource endowments, with real usefulness and value to the national economies, which are not included in this system of national accounts.  Ecosystems have a worth—like infrastructure—as they provide services to those around them. For example, coral reefs and mangroves provide coastal protection; trees store carbon and regulate temperature; and forests provide fuel and food.

It is for this reason that I was heartened to see the World Bank develop a partnership to give developing countries the tools they need to integrate ecosystem services into national accounts.  According to a recently published paper, the World Bank estimates the economic value of farmland, forests, minerals, and energy worldwide exceeds $44 trillion, of which $29 trillion is in developing countries and conserving forests would avoid greenhouse gas emissions worth $3.7 trillion by 2030.  In recognition of this crucial element of the global economy, the World Bank’s Global Partnership for Ecosystems and Ecosystem Services Valuation and Wealth Accounting will attempt to “refine the methodology for calculating the value of ecosystems and to ‘mainstream’ green accounting in the pilot countries.”

Any Economist worth their snuff will tell you that more information is (quite nearly) universally and unequivocally better.  The entire science of economics is based on access to information.  Without it participants of a market cannot make informed and rational decisions.  Without it policy makers cannot make informed and rational policies.  Information and transparency are the keys to better economics and better forms of Capitalism.  So with that in mind, let’s keep moving forward with more transparency, more information, and better economics.

Written by Ann Hollingshead

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